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NPS: The Tax Axe
Sucheta Dalal 31 March 2015
Dhirendra Swarup, architect of NPS wants to you to be taxman’s guinea pig
 
The National Pension Scheme (NPS) was launched in 2004, as a defined-contribution-based pension system, which would nudge people into long-term savings, that would provide a comfortable retirement income. Eleven years later,  even those involved in the launch of NPS seem confused about its design, marketing and taxation.
 
Initially, this excellent savings product failed to take off because no one would market it: the pension regulator had decided that no sales commission would be paid to distributors. At Moneylife magazine, we still thought that NPS was worth recommending to savers, until a new chairman at the pension regulatory body began to fiddle with its structure and sent out mixed signals on commissions.
 
Ever since its launch, the finance ministry has struggled to find ways to make the product more attractive. One finance minister decided to credit Rs1,000 into each new account opened in 2010, for five years. Even that has not attracted ordinary people. Then, the 2015-16 Budget not only increased the tax-deductible investment limit for NPS under Section 80CCD—from Rs1 lakh to Rs1.5 lakh—but offered the provision that an additional Rs50,000 invested in NPS can be claimed as a deduction under the new Section 80CCD (1B). Will this drive people to invest in NPS? Yet another finance minister, it appears, does not understand what makes people choose long-term investments. 
 
On 23rd March, Dhirendra Kumar, an investment expert, asked and answered this question in his column in The Economic Times: “Will NPS (National Pension System) investors be hit with a tax surprise when they retire? The unfortunate answer is that no one knows with certainty, and no one in the government has bothered to clarify.” Unlike other long-term investments, like public provident fund (PPF), the NPS corpus cannot be entirely withdrawn by the saver—40% of it has to be compulsorily invested in buying an annuity and the pension earned on it is taxable. The remaining 60% can be withdrawn; but it will be taxed, too. 
 
Dhirendra Kumar argues that NPS should logically be treated like a debt-oriented hybrid investment scheme with regard to its tax treatment—in effect, investment return from NPS should be treated as a capital gain with the benefit of indexation. Since there were contradictory views on the issue, he checked with Dhirendra Swarup, a former Union secretary and the first Pension Fund Regulatory and Development Authority (PFRDA) chairman. Mr Swarup, he writes, thought that it made sense for indexation benefit to be available for NPS, but “it would actually get tested only when someone would file an income-tax return with such an assumption, and then the assessing officer would reject it and then there would be a round of appeals and cases and arguments and so on.”
 
The absurdity of this situation is only rivalled by the shocking comment of Mr Swarup. The architect of NPS and the investment expert are both wrong, apparently. There is no need to wonder about tax treatment on NPS. A government circular has clearly clarified that the entire corpus will be taxable  without any indexation benefit. Astonishingly, not only does the former pension regulator not know this but, as a bureaucrat who earns a hefty, inflation-adjusted pension from the government, Mr Swarup is nonchalant about a senior citizen having to become a guinea pig to test out the tax treatment on a long-term retirement product he has created. The middle-class investor should thank his lucky stars that s/he has steered clear of NPS.
Comments
Mahesh S Bhatt
10 years ago
Problem is Govt consciousness of Social well being is killed somewhere by brutal Corporatization of Government.

Americans failed the world with capitalism & we are on the same track.

Government doesnot want any security but already loaded us with 84+ types of taxes.

More laws more corruption.Shall lead to anarchy followed by revolutions.

"Jiska Raja Vyapari Uski Praja Bhikari"

Kings should not act as Businessmen.

Balance is crucial & this is missing. God Bless Mahesh
Reply
Prakash Patel
Replied to Mahesh S Bhatt comment 10 years ago
Govt.is not concerned with social security of its employees by starting NPS,it only wants to shift burden of mammoth pension of its employees to market as it is not able to handle this burden on its own.
Why blame it on capitalism,the problems in US since 2008 and later in EU are not due to capitalism but are due govt interference in economic affairs of these countries.
Reply
Milind Karnik
10 years ago
It would be interesting if Mr. Swaroop is asked whether he himself has invested in this scheme.

Any guesses?
Reply
Mr Jitendra
Replied to Milind Karnik comment 10 years ago
D Swaroop retired from the IAS services and is well served with the government. He may claim he is not eligible to invest in NPS.This is like asking Mutual Fund Managers to buy their own schemes. None of them maybe buying their own schemes.
Reply
Prakash Patel
10 years ago
Unless it is treated as EEE it is difficult to take off.
Reply
Mr Jitendra
10 years ago
NPS has various agencies involved and a complex architecture. Eg PPF has a single window interaction i.e your bank, you and your PPF passbook. NPS is far more complicated. The person whom you pay money, the person who credits the money, the person who invests the money are all different with no grievance redressal mechanism in place at any level. It may have been done on purpose that way.
Moreover when you take corpus and ask for pension from a insurance agency entitled to pay annuity, the annuity providers may join hands and offer only a paltry rate of interest. Today that thing is difficult to imagine but once there are lakhs of NPS retirees the fun will begin.
Reply
Mr Jitendra
10 years ago
This is a classic case of "passing the buck". Everyone pretends that they dont understand what Dhirendra Kumar or investment experts are saying. They understand quite well pretty well what is the wish of the workers. However they pretend not to understand. This is a classic red tape behaviour especially with the officers. I dont even know if a proposal was mooted by anyone from PFRDA to get the NPS as EEE. And even if it was made it may have been a half hearted attempt by not meeting the PM and FM and no followups. EPFO is going the same way. They want to deduct 12% of all allowances entire salary and nothing from employee. When asked what made you people come up with such idea in 2015, they replied back with six words only which are not relevant. Somehow the system is not working in favour of citizenry.
Reply
Alex D
10 years ago
Being a young Central Govt. employee I have to deal with this situation day in and day out. The older employees who are not covered under the New Pension Scheme are not bothered about the NPS and we,the younger lot, are kind of left in the lurch as to the nuances of NPS.Moreover the NSDL steers clear of any policy related queries as they are only the manager of the money.
Reply
Vishal Modi
10 years ago
How I thank my lucky stars that at least one media company has the guts to call a pig a "pig!" A grateful reader,
Reply
Gandu Naresh
Replied to Vishal Modi comment 10 years ago
But this has been flagged in a column in the Economic Times by Dhirendra Kumar, which is quoted in this article by Sucheta Dalal.
Reply
Vishal Modi
Replied to Gandu Naresh comment 10 years ago
Sadly, I do not understand your feelings. What are you feeling hurt about?
Reply
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